I have been fielding many questions lately about the cost of goods sold line on the profit and loss report in QuickBooks.
Time to take a closer look...
For this article, we'll focus on inventory parts and inventory assembly items in your QuickBooks.
IN THE BEGINNING...
When you created your inventory part or inventory assembly item the very first time in QuickBooks, you had to tell it what "COGS Account" (COGS = Cost of Goods Sold) to use. See the example screen shot below:
When this item appears on an invoice or sales receipt in QuickBooks, the instructions above tell it to post to the 50100 - Cost of Goods Sold Account each and every time. No exceptions (your business may only use account names and not numbers - that is just fine).
WHERE DOES IT GET THE AMOUNT?
As we know, for every transaction in QuickBooks, there is not only a ledger account but also an amount that has to post.
Much confusion exists as to where QuickBooks pulls the actual amount that gets posted to the COGS account.
Here's the scoop...
For inventory parts and assembly items, QuickBooks pulls from the value in the "average cost" field to fill in the cost of goods sold amount when the invoice or sales receipt is completed. See the screen shot below:
In the example above, if 2 of this particular item were sold on an invoice or sales receipt, a total of $6 would post to the 50100-Cost of Goods Sold account.
Keep in mind that this is an average cost - it is not a FIFO, LIFO, Standard or Landed Cost.
DON'T BE FOOLED
Many have been mistakenly led to believe that the cost that posts to the COGS account is not the average cost amount, but rather, the amount showing in the generic "Cost" box. See the screen shot below:
This understanding is not true. The generic "cost" box is more of a "management cost" type of box that is either updated manually or when purchase orders are created.
UNDERSTANDING THE PROFIT AND LOSS
My hope is this brief lesson will help you have a better understanding of the activity that is showing up in the cost of goods sold account on your QuickBooks profit and loss report.
Of course, other transactions such as bills or credit card entries can also post into the COGS account, but understanding how inventory parts and assemblies post will be a big plus to help you manage your business...